Trader thoughts – the long and the short of it

The mood on social media and trading floors suggests bearish sentiment is on the rise, even though US equity markets have only fallen modestly and there really hasn’t been any one piece of news that has been catching attention. US Q4 earning season seems the next likely catalyst, with expectations of strong earnings growth keeping the sellers at bay...for now.

The lion’s share of the overnight news flow has centred on Hollywood heavyweight Meryl Streep taking on Donald Trump to an audience of 20 million people. Predictably, Trump came out with a strong rebuttal. We have also heard fairly hawkish comments from the US Federal Reserve (Fed) president Dennis Lockhart (a non-voter in 2017) calling for two, potentially three, hikes in 2017. But more important were the comments from Stanford University professor of economics, John Taylor, who discussed the Fed being behind the curve when it came to interest rates. However, if we look at the fed fund futures, we can see that the market’s rate hike expectations have dropped a touch for 2017.

Keep an eye on future commentary from Mr Taylor, as he is looking like a potential candidate to replace Janet Yellen as Fed chair in 2018 and thus will be one of, if not the most, important people in financial markets in the years ahead. He is advocating a tighter policy stance, in line with Mr Trump, which needs to be a consideration.

We have seen some modest weakness in the USD, spurred on by buying in all parts of the US fixed income curve (the five-, ten- and 30-year Treasuries are all down four basis points), although the USD index is being supported by a weaker GBP/USD. GBP has sprung up as the ugliest house on the block again and the big flows have been against the AUD and NZD. GBP/AUD has had its biggest fall (currently down 1.9%) since early August and I can’t help but feel that this pair will trade lower from here. Brexit is firmly back on the radar, with the UK Supreme Court likely to hand down its verdict on parliamentary influence on Article 50 (speculated as 23 January). The market is placing a higher risk premium on GBP ahead of the 31 March deadline.

We recently saw the UK ambassador to the EU (Ivan Rogers) quit his position amid views that Brexit is going to lead to ‘mutually assured destruction’. The carnage on the London railway system overnight makes selling GBP even less attractive and the heart goes out to all the commuters caught up in the mess.

The AUD itself has been supported by a strong move higher in bulk commodities. In the Dalian futures space, we have seen iron ore +4.7%, steel +3.8% and coking coal +4.3%. This is certainly helping positive AUD flows, with AUD/USD looking to break above the November downtrend at $0.7366. My preference as a short-term trading call is short GBP/AUD. Even AUD/NZD longs look compelling on a break above supply through NZD 1.0500.

Outside of the bulks, we have seen some constructive moves in precious metals again, with both platinum and gold printing a higher high in the move that really started from late December. I am still holding a long trading bias on platinum and view a move into $1000 to $1020 as achievable. Certainly, the price action here suggests the bulls are in control and the probability of further upside is greater than downside. The same can be said for gold - I still feel $1200 is not a stretch as a short-term target.

On the equity front, we expect slight weakness in the ASX 200 and more pronounced weakness in the Nikkei after being closed yesterday. Price action in the Aussie market from 10.30am AEDT is key though, as the market would have priced the various overseas leads in and had time to reflect on the state of play. Calmer heads will act accordingly. The strong upside move yesterday, a turnover of $5.472 billion, suggests trading desks were more suitably manned. It will be interesting to see if market participants support the likely opening dip into 5795, which could say a lot about local sentiment. Judging by the various ADRs, we should see BHP and the oil plays open on the back foot, given US crude settled at $51.96 (-3.7%). We should see an extension of the recent gains in the Aussie banks, with gold stocks a likely standout.

Keep an eye on China, with December CPI and PPI due out at 12.30pm AEDT. Producer inflation is expected to increase significantly to 4.6%, although consumer price inflation is expected to stay subdued at 2.2%. It’s clear that downstream producers are having to take the hit of higher input costs and not pass these onto the consumer. All eyes are on USD/CNH though, as a big move higher in inflation could give the People’s Bank of China scope to tighten policy - although the focus on the housing market suggests putting up rates could send a sharp signal to property investors.